Retail therapy may cure the Sept. 11 blues for consumers of luxury goods in 2002, but it's unlikely to work for the investor.

Amid the human suffering that followed the Sept. 11 hijack attacks on the U.S., the fallout in the luxury goods industry was of little enough consequence, but the two were and remain inextricably linked.

Faced with economic stagnation in the all-important Japanese market and recession in the United States, producers of exclusive clothing, jewellery and accessories were facing a difficult year even before the U.S. tragedy.

A loss of appetite for ostentatious purchases and mass cancellations in holiday travel all but put an end to the tourist, airport and duty-free sales that are a mainstay of big-ticket discretionary spending.

The impact on stock prices was immediate. Since Sept. 10, world luxury goods leader LVMH has underperformed the DJ Stoxx European cyclical goods index by 12 percent, exclusive jeweller Bulgari by 24 percent, and diamond producer Richemont by 15 percent.

ALWAYS LOOK ON THE BRIGHT SIDE

These figures make bleak reading, but depressed prices could present a buying opportunity for some stocks in a sector some experts say will be through the worst by this time next year.

"I am quite optimistic about things," Milan-based fashion guru and industry adviser Carlo Pambianco told Reuters.

"There had been a drop in consumption before the attacks and that steepened into a sharp fall on Sept. 11, but I believe we can return to the strong spending levels of the boom years of 1999-2000."

Perhaps, but with the exception of the super-rich for whom no recession is deep enough to alter spending habits, luxury-goods consumers will want to see signs of an upturn in the economy before opening their Luis Vuitton purses.

While most forecasters — including the U.S. Treasury itself — believe the United States will emerge from recession in 2002, more worrying is the fact that the Japanese economy is expected to remain mired in a deflationary swamp of unprecedented depth.

U.S. broker Goldman Sachs estimates that 26 percent of all luxury goods sales are made to Japanese tourists abroad, and a further 20 percent are sold on the Japanese domestic market. U.S. luxury consumers account for just 15 percent.

What's more, a fall in the yen has reduced the value of Japanese sales to European luxury goods producers in euros.

For a typical luxury-goods company that reports sales in euros and makes a fifth of its sales in yen, the 7.9 percent drop in the yen against the European currency since Jan. 1 knocks a couple of percentage points off the top line.

And against the dollar, the 15 percent fall in the value of the yen translates into reduced spending power for the Japanese abroad, dampening the desire to spend among those who do choose to take a foreign holiday.

SWATCH TO WATCH

No-one expects luxury goods spending to boom, but a moderate recovery in 2002 could leave some stocks seriously undervalued.

France's Hermes, for example, is rated "market outperformer" by brokers Goldman Sachs following strong third-quarter sales and despite the fact that the maker of silk scarves and leather goods is trading at a premium to the sector.

Watchmaker Swatch is another widely tipped stock, rated as a "buy" by brokers Sarasin on the strength of its broad product and brand portfolio, which includes top names such as Omega and Tissot as well as the eponymous fashion watches.

The Swatch share has outperformed the cyclicals index by no less than 27 percent since Sept. 10, and the company recently boosted investor confidence by announcing that pre-Christmas sales were beating expectations.

But the sector's biggest names such as LVMH and Gucci mostly have "hold" or "underperform" ratings, and worse-than-expected third-quarter figures from Gucci earlier this week led to a further round of estimate and rating cuts.

Sending a chill through a sector hoping for a return in the feel-good factor next year, Gucci Chief Executive Domenico De Sole told Reuters a recovery would be some time in coming.

"We believe that spring will continue to be quite difficult, (but) conditions will improve in the second half," he said.

THE BILLION POUND RAINCOAT

If soggy sales fail to excite would-be investors in 2002, perhaps at least one stock market flotation will.

Burberry, rejuvenated supplier of check and tweed fashions to the world, is due to make its stock market debut by the second half, although owners Great Universal Stores Plc have yet to fix an exact date.

The timing of the float, which could see 25 percent of Burberry listed and could raise a billion pounds, would depend "on a combination of factors," GUS chief executive John Peace said recently, listing market conditions, trading momentum in the business and upside potential to shareholders.

If successful, the issue would at any rate go one better than Italian fashion house Prada, which had to call off a listing twice last year, opting instead for a $700 million bond issue convertible into shares — assuming there is a listing within a period of three and a half years.

So until the world's luxury shoppers feel a little better about life, luxury investors might be advised to stay away. But Carlo Pambianco at least believes there are some elements of consumer behaviour that will never change.

"What I am convinced of is that the model of consumption won't change. People will still buy quality, still buy for the status symbol factor," he said.